Entertainment (meals and FBT)

Entertaining clients, customers, employees and suppliers is a cost of doing business.

But the total cost of entertainment varies wildly depending on who does what with whom where and why.  According to the ATO there are 38 consequential outcomes.

The main determinant of the outcome is which of three FBT methods is used to determine any Fringe Benefits Tax – those being:-

  1. Actual method (being the only method that provides an exemption for minor and infrequent expenditure).
  2. 50/50
  3. 12 week register.

Generally speaking, the smaller the business, the more attractive is the actual method (but again that depends on who is doing what with whom where and why).

The next consideration is what exemption can be used.

The actual method (which as stated above can only be used when the actual method has been chosen) exempts entertainment which is minor and infrequent and the cost per employee is less than per employee.

Also exempt is in house meals – being simple meals such as sandwiches.

You can read more here.

But the costs of getting it wrong is huge as the FBT tax rate is 47% (and that is without including fines and interest).

Please call us if you have any questions.

Is your ute or van subject to FBT?

Is your ute, van or workhorse vehicle subject to Fringe Benefits Tax (FBT)?

Workhorse vehicles have always been treated favourably.

However the ATO now has safe harbour provisions which you need to test against.

If those safe harbour provisions are satisfied for each vehicle, then no FBT is payable.  This means that you have to have the necessary proof and declarations.

If those safe harbour provisions are not satisfied, then you will have a very hard time forming an opinion that FBT does not apply.

So that you can better understand your position, you can read more by clicking on the following link – click here.

This matter has become even more important pursuant to the ATO’s more aggressive approach in reviewing car claims and employer provided cars.

We welcome any question you may have.

 

Important SG super & payroll reminders

With the end of the March quarter comes some important SG super and payroll reminders.

Friday 28th April is the end date for satisfying Super Guarantee (SG) super obligations for the March 2023 quarter.

But beware as some of the clearing houses have a submission and payment deadline well before then.  May be even next Tuesday!

SG super is payable on all forms of remuneration including:-

  • Commissions
  • Bonuses (but see below)
  • Directors’ fees and all other forms of remuneration to directors
  • Allowances (except where fully expended)
  • Contractors paid mainly for their labour

But excluding the following remuneration:-

  • Overtime
  • Reimbursements
  • Unused annual leave on termination
  • Bonuses that are only in respect of overtime
  • Bonuses that are ex-gratia but have nothing to do with hours worked (which is harder to satisfy than what you might think)
  • Employees carrying out duties of a private or domestic nature for less than 30 hours in a week (such as nannies)
  • On quarterly remuneration greater than $60,220
  • Non-residents performing work for an Australian business outside Australia

If your payroll system has been set up correctly then it will perform these calculations for you.  We would welcome the opportunity to assist you with this and if need be refer you to a good book-keeper.

SG super should never be paid late as late payments attract substantial interest and penalties.  Furthermore, and SG (and BAS) liabilities that remain unreported and unpaid after 3 months become personal debts of directors.

So if you haven’t paid your employer super obligations already, we recommend doing so today!

We take this opportunity to remind you of the following matters:-

  • The SG rate is currently 10.5%.
  • We are currently following up any employing clients who have not returned their 2023 FBT questionnaire.  You can read more in our email to employers of 31st March.
  • Single Touch Payroll disclosures will be increase under what is called STP2.  Your software provider will have and will continue to be in touch about what needs to be done – but please note their extensions are about to run out and you soon need to be fully compliant.
  • Be very wary of this as STP2 permits Fair Work Australia to follow up any non-compliance, particularly in respect of under paid wages.
  • Please be mindful that there is no longer a $450 threshold.

As always, we welcome your calling us to ask any question you may have.

80,000 – I don’t think so

How many are we being told will be affected by the excess upper tax?  We are constantly told 80,000.  80,000 – I don’t think so.

Today Money Management published worrying findings from the Financial Services Council (SFC).

FSC’s modelling has shown that each of the following will breach the $3,000,000 threshold by the time they are 65:-

  • A 55 year old earning $220,000 with a current super balance of $1,400,000 (not even half of the threshold).
  • A 45 year old earning $150,000 with a current super balance of $650,000.
  • A 25 year old earning $1000,000 with a current super balance of $35,000.

That 25 year old could be a IT professional as per FSC’s example – but it will also catch all those tradies working their socks off at the moment.

Seems to me that saying this proposed extra super tax will only hit very few is grossly misleading.  In fact I question how many more than the often repeated 80,000 will exceed this threshold come 2025/26 – estimates I have read so far start at 500,000 – but it could be many more than that.

 

Think you may not be caught by the excess super tax – then read on

Think you may not be caught by the excess super tax – then read on.

The announcement as to levying extra tax on those people with total super balances over $3,000,000 has certainly caused a stir.

Treasury has already worked out how the system will work (contrary to what the Deputy Prime Minister said on the Friday morning TV news).

So let’s explore how quickly people will start to pay this tax given the threshold will not be indexed.  And to put it into perspective let’s first look at the time value of money.

$3,000,000 may sound a lot today – but you could buy family home in many parts of Melbourne 30 years ago for less than $100,000.

And look at it this way:-

  • In 2013 Labour was floating exempting the first $100,000 of a super pension being paid from an accumulation (not to be confused with the extremely generous defined benefits that politicians and senior public servants received – which have escaped the current round of fire).
  • In 2016, the then reigning Liberal government introduced a Transfer Balance Cap (TBC) of $1,600,000 – being an indexed maximum amount you could have in pension mode). $1,600,000 earning a modest return of 6% would equate to almost $100,000.

So it can be said that even though 3 years apart, both parties had a similar idea as to what a reasonable super balance in retirement capped out at.

So what are those amounts worth today?

The $1,600,000 was indexed to $1,700,000 from 1st July 2021.  Whilst that took 4 years, it has only taken another 2 years for inflation to jack it up to $1,900,000 which it will be from 1st July 2023.  So what will it be by 1st July 2025?  Very possibly at least $2,000,000 but more likely $2,100,000 the way inflation is running.

$3,000,000 may sound like a lot but the time value of money means it is worth a lot less than what most people think.

No wonder predictions are 500,000 mum and dad Australians will breach this cap come 2025/26.  And how many by 2030?  Roll forward to 2055 and it could be an alarming number (noting how house prices have inflated from 30 years ago).

So what does this mean to Fred who retires at the start of 2025/26 with $2,000,000 in super?

Fred (with a life expectancy of +/- 20 years) makes a downsizing contribution from the sale of his home of $300,000 (downsizing being a policy supported and widened successively by both parties).

Good investing could see his super earn 4% franked dividends and with growth of 5.25% – the return would be 11%.  In this case, Fred will start paying this extra tax from the 2029/30 year – it has only taken 5 years to fall into the system!  He started at only 2/3rds of the threshold but has breached it within 5 years.

And what if Fred is solely in accumulation for personal reasons?  Well he will fall into the system from the fourth year.

And what does this mean for the 2029/30 year?  In the first year the tax will only be $860.

But by 2038 the tax has grown to $27,221.  Seems a lot of tax to me particularly if the supporting assets haven’t been sold – and may even fall in value.  Roll forward another 5 and 10 years and the numbers start becoming eye watering (noting that one is taxed on the growth even if the assets aren’t sold or subsequently fall in value – think PayPal’s fall from its highest price to when it delisted).

And what about Jack who has $2,000,000 in super today?

Jack retires at age 65 in 2025/26 at which time he makes a downsizing contribution in addition to three years of making maximum super contributions (net of 15% tax).   Well Jack has the honour of being levied the excess tax from 2026/27.  Fred has started with $2,000,000, followed the rules, but is subject to this new excess tax from just its second year!

It is misleading to say this only affects 80,000 Australians.  As every year goes by, an increasing number of Australians will have their retirement savings eroded by this tax.

It will be interesting to see modelling of how many current 25 year olds will fall into the system by the time they reach age 65.

 

Important change to claiming home office expenses

Do you want to claim the home office expenses you are entitled to claim for 2022/23?  Then read on as the ATO has made an important to change claiming home office expenses.

Furthermore, they apply from 1st March.

We have been able to claim under one of two methods:-

  • A percentage of all costs based off the work area or
  • A set rate per hour

The set rate per hour had been 52 cents per hour but an alternative rate of 80 cents per hour was offered from March 2020 to June 2022 to accommodate all of those working from home for the first time and who were not used to keeping records.  The 80 cph rate was an all in rate.  Only the 52cph rate allowed one to claim phone, internet and assets (whether claimed in full or depreciated).  As I said, that 80cph rate is no longer available.

Please note that this post is not addressing claims where a business is run from home (with important capital gains tax implications).  That will be covered in a future post.

A new rate is available from 1st July 2022 but please note:-

  1. The rate has increased from 52 to 67 cents.
  2. What the rate covers has changed.
  3. There have been important changes to the records required.
  4. But there is good news. The requirement to have an area set aside to undertake work activities has been removed.

What does the rate cover?

  • Electricity and gas
  • Home and mobile phone usage
  • Internet connection usage
  • Printing and stationery

The change is that other than electricity and gas, these costs could be claimed separately.

Depreciation is to be claimed separately

What records you now need to keep

  • Receipts – but just one quarterly electricity or gas bill (I don’t know about you but I receive these bills monthly).
  • A record of actual hours worked – no estimates. So you will need to keep timesheets, rosters, diaries and other such documents.
  • You will need to keep these records for up to 5 years – even though most taxpayers are required to keep for less.
  • Please note that for assets that are depreciated, one must keep the asset purchase receipt for 5 years from after the last depreciation claim. That could be 10 or 15 years after the date of purchase.  We suggest moving a copy of the receipt into next year’s tax records when starting your record keeping for a new financial year.

A partial year concession

These new rules announced last week apply from 1st July 2022.

As a concession to those who haven’t kept a record of actual hours worked since 30th June 2022 to 28th February 2023, a reasonable estimate, or in the ATO’s words, a representative record, will suffice.

To be able to claim, you must keep an actual record of hours worked from 1st March 2023.

How to keep records

This is an important change which you need to adhere to claim home office expenses from 1st March 2023.

We welcome any questions you may have.

 

Upcoming interest rate rises

It seems all the pundits are now predicting not only a rate rise next Tuesday of 0.25% but another 3 such rises during the year.  For many newish homeowners, this means the base rate of 4.1% is well above the 2.5% interest stress test under which they gained their loan.

So what does this mean to your personally and/or your business?

One number I have heard is that there are 110,000 households in Melbourne suffering mortgage stress.  And that is no surprise when you consider that the repayments on a $750,000 loan have already increased by $1,300 per month.  And if they increase by another 1%, then those repayments will increase by a further $480 per month.  It s scary to contemplate what that current number of 110,000 will grow to.

You can find out more and be given actions you can implement in our webinar tonight at 5:30.  We will also explore 4 other key areas to plan and protect against in 2023.

You can book your place at https://tinyurl.com/bdvxtvmn

5 key actions in 2023

There are always challenges but we seem to currently have our fair share.  We currently see 5 key actions required to navigate 2023.

The question is what are you going to do about them?  Are you going to let them control you?  Or are you going to protect yourself from them to ensure your business or yourself personally doesn’t suffer?

We see 5 risk areas to navigate in 2023:-

  1. Cyber crime & computer safety.
  2. Inflation.
  3. Interest rates (and cash flow).
  4. Technology.
  5. Protect personal wealth that is otherwise exposed.

The degree to which these 5 risks affect you may be different to others and may be one or two don’t affect you.  But doing nothing is rarely the best option.  We therefore encourage you to attend our upcoming webinar on Tuesday 31st January at 5:30 during which we explore these risks – and more importantly, the 5 keys actions you can implement in face of them.

You can reserve your place by clicking here.

And as we are passionate about helping small businesses, we welcome your extending this invitation to family, friends and business colleagues.

 

SG deadline reminder

I trust you had an enjoyable festive season – and back into it we go!  So here is a quick SG deadline reminder.

Friday 27th January is the end date for satisfying your Super Guarantee (SG) super obligations for the December 2022 quarter.

Please make sure you do not confuse this obligation with the December quarter BAS.  The December quarter BAS automatically has a one month extension to 28th February to all.  There are no extensions for reporting and payment of SG super.

Please note that super clearing houses take up to 8 days to pass the money through to the super fund.  It therefore means that processing and payment to the clearing should be made as soon as possible.

And please make sure you have been calculating super at 10.5% since it increased on 1st July 2022.

SG super should never be paid late as late payments attract substantial interest and penalties.  Furthermore, SG (and BAS) liabilities that remain unreported and unpaid after 3 months automatically become personal debts of directors.

We also take this opportunity to remind you of the imminent migration to Single Touch Payroll 2 with its extra reporting requirements.  Please do not hesitate if you would like an introduction to a payroll specialist.

We welcome any questions you might have.

 

How to avoid making Christmas too taxing

Entertaining and providing gifts at Christmas time to staff, customers and suppliers is a cost of doing business.  However, there are some important FBT, GST and income tax considerations and outcomes to keep in mind.

As an employer, you need to be careful at what you provide at Christmas.  The rules are complex and the costs of getting it wrong can prove very expensive.

We will outline some of the more common scenarios and what to be careful of.

Under-pinning the implications are the following key points:-

  • Christmas parties, entertainment and gifts are all treated under entertainment tax rules.
  • FBT applies to benefits given to employees.
  • There are no FBT implications on entertainment and gifts given to customers, clients and suppliers.
  • There are three methods under which an employer can quantify the taxable components of any entertainment expenditure – in fact there are 38 permutations depending on who is entertained where, how and with whom.  We will largely address the actual method which is the one used by most small businesses (as it usually results in the best outcome).  It is beyond the scope of this briefing to address the 12 week log method and we will only touch upon the 50/50 method where relevant.
  • Christmas comes but once a year and to the best of my knowledge and experience does so on 25th December.  Nevertheless, the ATO treats Christmas parties and gifts as being what are called minor, infrequent and irregular benefits.
  • Such minor benefits are FBT exempt where they cost less than $300 (including GST) provided the actual method is used to quantify entertainment.

The Christmas party

Where entertainment is calculated under the actual expenditure method (which is the most common method for small businesses):-

  • A Christmas party is held on-site on a work day, the whole cost for each employee will be an exempt fringe benefit.  So too will the spouse’s cost provided the cost per spouse is less than $300.  No income tax deduction can be claimed for the cost of the party including that in respect of any family members that may attend.  Taxi travel to or from the workplace (not both ways) will be exempt from FBT and not tax deductible.
  • If a Christmas party is held off the work premises, then the whole cost will be exempt from FBT provided the party costs less than $300 per person (employees and their spouses).  No income tax deduction can be claimed for the cost of the party including that in respect of any family members that may attend.
  • If an external Christmas party costs more than $300 or more per person then the total cost is subject to FBT.
  • The cost of any entertainment provided during the party (whether that be at the work premises or outside) will be exempt if it costs less than $300 per head – for example a DJ, musician, clown and comedian.
  • The cost of entertaining clients, customers and suppliers is not subject to FBT and is not tax deductible.
  • If any exemption is exceeded then FBT is payable.  Consequently, an FBT Tax Return must be lodged and FBT paid (the FBT tax rate being the same as the top marginal tax rate).  Please keep this in mind when completing the 2018/19 FBT Questionnaire in early April 2019.
  • All other entertainment during the year will be subject to FBT on a case by case basis.

 Where entertainment is calculated under the 50/50 method:-

  • 50% of the cost will be subject to FBT and this portion will be tax deductible.  The other 50% will not be subject to FBT and will not be tax deductible.  An FBT Tax Return must be lodged and FBT paid.
  • Only taxi travel from home to the venue will be FBT exempt and not deductible for tax.
  • 50% of all other entertainment during the year will be subject to FBT.

Gifts

The following gifts are exempt from FBT and are tax deductible:-

  • Hampers, bottles of wine, gift vouchers, a pen set costing less than $300 (inclusive of GST).

The following gifts are subject to FBT and are not tax deductible:-

  • Tickets to a sporting event or theatre, holiday, accommodation, etc.

The GST treatment of gifts is:-

  • The GST component of any tax deductible portion can be claimed back.
  • The GST component that relates to the non tax deductible portion can’t be claimed.

 

Please do not hesitate to call us should you have any queries.